UK on House Price Bubble Cusp as Demand Outstrips Supply

A sign is seen outside newly built houses in Aylesbury, southern England

Britain is the on the cusp of a housing price bubble as the demand for new housing is, by far, outstripping supply.

According to a new survey by property website Rightmove, UK asking prices have rocketed by 8.8% in the first eight months of 2013 and a further 5.5% year-on-year.

However, prices fell 1.8% in August month-on-month amid the traditional summer slowdown, recording the first monthly decline in 2013.

"Fewer sellers come to market, down 8% on last month, with discretionary sellers more focused on holidays and content to wait for the busier autumn selling season," said Rightmove in a statement.

London Bolstering Prices

In London, asking prices rose 10.2% year on year in August, while the rest of the country saw an average 2.8% increase.

The government has helped buyers with its schemes, which are intended to lower mortgage rates and ease requirements to take loans.

In 2012, the Bank of England launched the Funding for Lending (FLS), which helps banks to provide loans at lower interest rates to businesses and individuals. The government also launched the Help to Buy Scheme, a support package for first-time buyers, which includes an interest-free equity loan of up to 20% of the property value.

Mortgage payments account for 27% of a new borrower's income in the second quarter of 2013, well below the average of 36% recorded over the past 30 years, according to Halifax.

Demand Outstripping Supply

Despite higher prices, the transaction volumes remain constrained due to lack of fresh property supply, Rightmove said. It asked the government to boost the supply of new homes to avoid a house price bubble.

"Demand is already on the up, and that's before the roll-out of phase two of the Help to Buy stimulus. It is now critical that the supply of property improves so that the goal of a significant increase in transaction numbers is not over-shadowed by an unsustainable boom in property prices," said Miles Shipside, Rightmove director and housing market analyst.

The number of properties coming to the market so far in 2013 has increased by just 0.2% or 1,664 properties from the same eight months in 2012. At the same time, transaction volumes tracked by Rightmove increased by 5% and its email leads to agents and developers have risen 17% so far this year.

This "natural lag between an increase in demand and a corresponding increase in supply" would result in a "short-term step-up in house price inflation", according to Rightmove.

"To improve muted transaction volumes further and satisfy pent-up demand it needs to be balanced by more existing home-owners trading up, more landlords selling, more homes being built and more residential conversions from non-residential use," Rightmove said.